Comparing Institutional and Retail Traders

Trading securities can be as simple as pressing the buy or sell button on an electronic trading account. A more sophisticated trader may opt for a more complex trade by setting the limit price on a block trade that is parsed over many brokers and traded over several days. The differences lie in the type of trader (retail or institutional), the level of sophistication, and the speed with which the transaction is required.

There are two basic types of traders: retail and institutional. Retail traders, often referred to as individual traders, buy or sell securities for personal accounts. Institutional traders buy and sell securities for accounts they manage for a group or institution. Pension funds, mutual fund families, insurance companies and exchange-traded funds (ETFs) are common institutional traders. There are many key differences between the two trading groups which for years had set them very far apart on the types of trades each could participate in, the costs per trade, and the level of information and analysis each received. While some differences still exist, the chasm between the two has significantly narrowed.

Differences between Retail and Institutional Traders

The following chart highlights the major differences between retail and institutional traders.

Types of Securities Invested In

Size of Trades

Transaction Medium and Costs

Impact on Security Price

Large Cap vs. Small Cap

Retail Trader

Stocks, bonds, options, futures. Minimal to no access to IPOs.

Typically make trades in round lots (100 shares) but can trade any amount of shares at a time.

Brokers, whether in-person or online, are the go-between for individuals. Traders may receive advice from brokers but the advice is not guaranteed and brokers are allowed to bet against the retail trader. Often charged a flat fee for each trade and required to pay retail marketing and distribution costs. (See: 12b-1: Understanding Mutual Fund Fees.)

The number of traded shares is too few to impact the price of the security.

Small cap stocks can have lower price points that attract retail investors who are able to buy many different securities in an adequate number of shares to achieve a diversified portfolio.

Institutional Trader

Same as retail but also forwards and swaps. The complex nature and types of transactions typically discourage or prohibit the individual trader. Granted and solicited for investment in IPOs.

Trade blocks of at least 10,000 shares.

Send trades through to the exchanges independently or through an intermediary but negotiate basis point fees for each transaction and require best price and execution. Not charged marketing or distribution expense ratios.

Can greatly impact the share price of a security. Institutional traders may split the trade among various brokers or over time in order to not make a material impact.

The larger the institutional fund, the higher the market cap the traders tends to own. It is more difficult to put a lot of cash to work in smaller cap stocks because they may not want to be majority owners or decrease the liquidity to the point there may be no one to take the other side of the trade.

The Bottom Line

Several of the advantages institutional traders enjoyed over average retail investors have dissipated. The accessibility of sophisticated online brokerages, the ability to trade in and receive more diverse securities (such as options), real-time data, and the widespread availability of investment data and analysis have narrowed the gap which once had been widely in favor of institutional traders.

But institutions still have numerous advantages such as access to more securities (IPOs, futures, swaps), the ability to negotiate trading fees, and the guarantee of best price and execution.

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